Why “time in the market” is not different from “timing the market”!

Published: March 29, 2021 at 10:30 am

Anyone investing in mutual funds would have heard the saying, “time in the market is better than timing the market”. This was propagated by AMC folk to try and stop fluctuating AUM and, therefore, income/commissions. However, “time in the market” or “staying invested” at all times or “buy and hold” is not different from “timing the market”! In fact, staying invested is a form of market timing!

Timing the market refers to some form of tactical asset allocation. The use of some method* to exit when the market is “overheated” or has lost momentum and re-enter when the market has “cooled down” or has gained momentum. New readers can check out the effectiveness of different strategies in our archive of tactical asset allocation strategies. *Crowdsourcing opinions about the market situation is not one!

As defined by the AMC and its sales guys, time in the market is “investing via SIP over the long-term”. They are most eager to tell us volatility is temporary (no it is not*) and that magnificent, allegedly 8th wonder of the world called compounding is permanent. They do not say so in so many words, but the impression made out is clear: if you stay invested, better returns are guaranteed. * If there is one thing constant about the stock market it is volatility!

Morgan Housel, in his book,  The Psychology of Money: Timeless lessons on wealth, greed, and happiness, makes the same mistake. Yes, yes, it is a good book, but he keeps talking about how “staying invested” leads to compounding but also refers to how “only the paranoid survive” and how appreciating uncertainty, the possibility of unknown risks and luck is important.

I am happy to attribute my past returns to luck, but to assume compounding will always work is the same as leaving the fate of my future returns to luck. One does not need to be paranoid to appreciate the risk of blindly “believing” in compounding.


Many would say, “but it is important to talk about the importance of compounding to make newbies invest”. Most people read only the brochure (like Housel’s book) and not the scheme document. It is quite hard to write a book for beginners without contradicting ourselves – that is the power of confounding!

Now, timing the market is plagued with technical and behavioural problems, and only very few can succeed. Sadly, “time in the market” or staying invested is also plagued with (different) technical and behavioural problems. Any experienced,  honest observer who has seen how mutual fund investors would tell you that here too, only very few can succeed.

Thus time in the market is quite similar to timing the market in terms of execution or the lack thereof. Amusingly, “time in the market” is also a form of  “timing the market”!

Timing the market is similar to how cricket is played. If it is light rain, play continues, but the players run back to the pavilion once it gets heavy. Several checks are made on the pitch condition after the rain has stopped, and play resumes only when the conditions are fit for play.

Just as cricketers do not or cannot play in soaking wet conditions, a market timer tries to stay away from the market when it heads south and tries to re-enter only when the sun is out again. I do not claim it is a good analogy, but I hope you get the idea.

Staying invested is similar to football. We can play football even in fairly bad weather. If it begins to pour, the players keep at it.  The “time in the market” investor keeps investing through hard times, waiting for sunshine. Waiting for that big year with bumper returns to change their lives (I am a personal beneficiary of this “strategy”).

If I stay invested, I tell myself, “the stock market cannot remain down forever, so let me wait. If I pull out now, I might miss the recovery. So let me get wet and wait for the sun to come out.

Thus staying invested is also timing in the market. In a sense, we choose to stay wet and wait for those big returns. Both parties are waiting for those big returns. The power of compounding evokes spreadsheet imagery like the below picture in us, but have a look at the table of Nifty 500 TRI annual returns (wrt 26th March)

power of compounding vs power of confounding
power of compounding vs power of confounding
DatePrev Date1-year CAGR = Absolute return in %
26-Mar-202126-Mar-202075.3
26-Mar-202026-Mar-2019-25.4
26-Mar-201926-Mar-20187.9
26-Mar-201824-Mar-201714.1
26-Mar-201526-Mar-201435.3
26-Mar-201426-Mar-201317.8
26-Mar-201326-Mar-20127.5
26-Mar-201225-Mar-2011-7.0
26-Mar-201026-Mar-200988.4
26-Mar-200926-Mar-2008-39.3
26-Mar-200826-Mar-200724.3
26-Mar-200724-Mar-200613.2
26-Mar-200426-Mar-2003103.6
26-Mar-200326-Mar-2002-3.1
26-Mar-200226-Mar-20013.9
26-Mar-200124-Mar-2000-43.4
26-Mar-199926-Mar-19984.6
26-Mar-199826-Mar-19975.6
26-Mar-199726-Mar-19964.0
26-Mar-199624-Mar-1995-15.4

The market-timer tries to reduce the impact of the returns in red, and this often means reducing the impact of the returns in green too (this may or may not be harmful or beneficial). See, Timing the market will work but not the way we imagined!

The buy-and-hold investors suffer the full impact of the red returns in the hope that green returns are around the corner (again, this may or may not be harmful or beneficial). The bottom line is, both parties are waiting – waiting for those big greens. It is in that sense everyone is “timing” the market.

Which is better? Time in the market or timing the market?

When we ask, “Which is better?” what are we implying?  Which is the better strategy for me to implement in future? Or Which has worked better in the past? Sadly, we cannot answer both questions if we strictly adopt a fact-based approach. If we adopt a faith-based approach, then it is quite easy to act superior and be judgemental.

What is the problem? I can do several backtests (and I have) to compare time in the market vs different timing strategies. My results tell me, timing the market to reduce portfolio risk is quite easy, but with most strategies timing the market for better returns is just down to luck. Even if I come across a timing strategy that “works” more often than staying invested (and I have), it is not a guarantee that it will work when you implement it in future.

Timing critics are quick to dish out statements like “if only you could backtest emotions”. The same statement is sadly true for buying and holding too. Very people can pull off long-term systematic investing regardless of market conditions. This is referred to as the “behaviour gap” (a disease that affects investors and advisors alike! Amusingly advisors think they are immune – the advisor gap!)

So both timing and buy-and-hold backtests do not include human emotions, and there is no way anyone can tell when you start investing which method will work better in the future. So the honest, fact-based answer to the question “Which is better?” is, “we do not know; we cannot know”.

Thankfully, “we need not know”. Thankfully, we need not time the market. All that is required is a firm understanding of our needs and systematic goal-based portfolio management. Since there are no guarantees, the next best thing to do is be aware of where we are wrt our future needs at any point in time to take preventive or protective action.

Some investors have asked me, “how can we start investing in a product which has no guarantees; in a method that has no guarantees?”. Well, life too comes with no guarantees, yet we live it with a mix of caution and optimism. Investing is no different! We have to stop thinking that our choices are better! We don’t know!


Check out our new debt mutual fund screener for selection, tracking and learning (March 2021)


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